Fresh thinking

Over the last few days, because reading this blog is easier than doing research, the mainstream media has discovered (a) this election could really screw up investing with a TFSA gut and (b) the political parties all want a housing bubble. Now that it seems certain interest rates will be higher in the months and years ahead, and Canadians’ personal finances suck, these are big issues.

As you know, the Cons will bring in a permanent home reno tax credit so every residence in the country eventually has a hot tub. They’ll also jack the amount kids can steal from an RRSP for a downpayment. The Libs will diddle with RRSPs, too, making it legal to move money to buy a house whenever you have a ‘life event.’ The Big Dipper has caved to CREA demands and will let amateur landlords escape capital gains tax, and Trudeau says he’ll give them $125 million for renovations. It just never ends.

On top of this, we have CMHC now allowing 100% of the rent from your mouldy basement suite as allowable income for a mortgage (double the old amount), and no political leader has thus far had the stones to stand up and tell people they’re borrowing too much. You can only assume air will continue to be pumped into the property gas bag until it rips.

Of course, there’s one other important issue when it comes to politics and housing – appealing to the lowest common denominator of xenophobia. We all know they really meant ‘Chinese’ when Harper and Trudeau pledged to study the impact of ‘foreign buyers’ on markets like Vancouver. It’s what the locals want. This is how you get elected. It’s called followership.

By the way, a new survey finds 69% of YVR dwellers think stupid high prices are the result of offshore (Chinese) buyers while 60% want to see limits put on foreign ownership. This despite the fact the real estate industry itself pegs the number of buyers at 5% of total deals, and the Victoria board (the only one which counts) reports non-Canadian buyers at 1.6% of the market.

Naturally, facts don’t matter when you have Twitter and Global television. So expect this to be a meme that carries through to e-day.

Now, let’s look at the real reason real estate in Vancouver or the GTA is a self-propelling, risk-laden phenom. Last month sales slowed in Toronto, but detached 416 prices jumped year/year by more than 12%. In YVR the benchmark price for a detached home is higher on an annual basis by 17.5%. This is the stuff of nosebleeds, at a time when our largest export industry is crippled, household incomes have stalled and the country’s in technical recession. How on earth could this be? What do the leaders have to say about cities average people can’t live in anymore?

You bet. Nothing. Except find new ways to shovel more buyers in, further augment values while building extra consumer debt. And ignore the elephant in the room.

Back to the survey, conducted by industry magazine REW. This is all about the Bank of Mom.

75% of the Millennials surveyed say they will need (and expect) a loan from their parents in order to make a downpayment.

Another 33% said they are looking forward to an inheritance in order to buy.

Among those ‘adult children’ between the ages of 41 and 50, a stunning 64% state they will be asking family for money in order to upsize their house.

Over half the buyers under 30 years old earn less than $70,000 but are buying houses averaging $400,000.

74% think houses are overvalued, but…

77% believe this is a good time to buy.

Well, there ya go. The real estate illusion. Boomer parents see a windfall increase in their equity so they borrow against it to give cash to their children to buy into the same market, creating more demand and putting further upward pressure on property values. The word ‘ponzi’ floats to mind. If this thing ever stops rolling, and starts reversing (it will), illusory equity will have turned into real debt.

It’s a mystery how smart, uber-educated kids who generally believe their parents are fossilized, if lovable, dorks can fall for this. How can 77% accept that buying something when it has never before cost this much, and involves unrepayable debt, be wise? Can’t they Google? After all, every boom in history has ended in a bust. Where there is an expansion, there is a contraction. The greater the increase, the more painful the decrease. And it’s always exacerbated by debt.

So, stop worrying about the Chinese and reflect more on the irresponsibility of parents. It’s also worth remembering that government policies – from 5% down insured mortgages which strip away lender risk to first-time buyer tax credits to free capital gains on houses – have created a nation steeped in house porn and now pickled in debt.